Core views

In the first half of 2024, the company achieved operating income of 2.707 billion yuan, a year-on-year decrease of 7.72%; realized net profit to mother of 0.592 billion yuan, a year-on-year decrease of 6.94%. Affected by market competition, all business lines were under pressure. In order to cope with the macro impact, the company actively controlled fees, and overall R&D/sales/management expenses decreased by 7.36% year on year. We believe that as the company actively develops customers, the contract debt as of 24H reached 1.388 billion yuan, a year-on-year increase of 19.48%, which may provide impetus for subsequent growth. At the same time, the company continues to increase investment in AI technology, empowering the existing product line, and is expected to continue to improve market competitiveness. The company's revenue for 2024-2026 is 8.044/8.681/9.71 billion yuan respectively, up 4.98%/7.91%/11.85% year on year, and net profit to mother is 0.252/0.381/0.498 billion yuan, up 27.45%/51.24%/30.70% year on year, corresponding to PE 77/51/39 times, maintaining” “Buy” rating.

occurrences

The company announced its 2024 semi-annual report. 2024H1, operating income was 2.707 billion yuan, down 7.72% year on year; net profit to mother was 0.592 billion yuan, down 6.94% year on year; net profit after deducting non-return to mother was 0.654 billion yuan, down 11.30% year on year.

Brief review

Revenue and profits are under pressure, active fee control to deal with macro-uncertainty, and contracts are responsible for continued growth. In the first half of 2024, the company achieved operating income of 2.707 billion yuan, a year-on-year decrease of 7.72%; net profit to mother of 0.592 billion yuan, a year-on-year decrease of 6.94%, mainly due to slow recovery in the macro environment, cautious IT investment by downstream customers, and slow recovery in demand. Gross margin decreased by 3.14pp year on year, mainly affected by fierce market competition, and gross margins of all product lines were under pressure. In order to cope with the uncertain macro environment, the company continued to implement cost reduction and efficiency measures, and overall R&D/sales/management expenses were reduced by 7.36% year-on-year. Furthermore, the company's net operating cash flow in the first half of the year was -0.977 billion yuan, down 239.94% year on year, representing an increase in the company's strategic preparation expenses; contract debt reached 1.388 billion yuan, an increase of 19.48% year on year, which is expected to support subsequent business development.

All businesses have shrunk across the board, and corporate customers are more resilient. By business, the company's cybersecurity business revenue was about 1.398 billion yuan, down 7.34% from the previous year, with a gross profit margin of 1.24pp. The main reason was the decline in revenue from mature network security product lines such as firewalls, and the volume of emerging strategic business products such as XDR was small, and the revenue drive from the cloud computing and IT infrastructure business was about 1.106 billion yuan, a decrease of 4.43% year on year, and the gross profit margin was 42.55%, down 5.31pp year on year, which is a decrease in revenue from desktop cloud products with a larger revenue volume Much; revenue from basic network and IoT businesses was about 0.203 billion yuan, down 24.13% year on year, gross profit margin was 47.75%, down 4.30pp year on year. This means that Xinrui Network Technology's revenue in traditional commercial markets declined. Looking at customers by industry, corporate customer revenue increased 2.51% year on year; government, public institutions, financial and operator customers fell 15.88% and 18.23% year on year, and enterprise customers were more resilient in IT construction.

Increase AI technology research and development and maintain leading market share. In the first half of the year, the company continued to increase investment in AI technology research and development and released the upgraded version of Convince Secure GPT 3.0. As of May 2024, more than 130 users had completed the test application and delivery of Convinced Secure GPT in real environments. Empowered by AI, the company's product market share continues to lead the market. According to the IDC report, it is convinced that the XDR platform is positioned in the “leader” category of the market; secure hosting service (MSS) has been ranked first in the remote hosting security service market for 3 consecutive years; and hyperconvergence ranks first in the hyperconverged market in China with a market share of 17.5%.

Investment advice: As the company actively develops customers, the contract debt reached 1.388 billion yuan as of 24H, an increase of 19.48% over the previous year, which may provide impetus for subsequent growth. At the same time, the company continues to increase investment in AI technology, empowering the existing product line, and is expected to continue to enhance market competitiveness. Based on the company's interim report data and comparable company financial situation, we revised the company's revenue and profit expectations (the original revenue for 2024-2026 was 8.291/9.111/10.064 billion yuan, net profit to mother was 0.268/0.357/0.505 billion yuan), and the company's revenue for 2024-2026 is 8.044/8.681/9.71 billion yuan, respectively, up 4.98%/7.91%/11.85% year-on-year, net Profit was 0.252/0.381/0.498 billion yuan, up 27.45%/51.24%/30.70% year-on-year respectively, corresponding to PE 77/51/39 times, maintaining the “buy” rating.

Risk analysis

(1) Risk of weak market demand: The domestic economic growth rate has fluctuated in the past two years. Upstream customer IT investment is cautious, and market demand is weak, bringing great challenges and difficulties to the company's performance in the short term, which in turn affects the healthy development of enterprises; (2) Industry competition has intensified risk: In the past two years, as compliance requirements weaken the driving force of the Internet security industry, the domestic cybersecurity market has gradually entered the Red Sea. Many manufacturers have adopted price war strategies in order to compete for market share, leading to a decline in the overall profit level of the industry, and the inability to invest in technological innovation and R&D, further leading to a high level of product and service products and services Homogenization; (3) Supply chain risk: Affected by the international situation and strategic adjustments of upstream manufacturers, various raw materials, including memory, SSD, and HDD, were in short supply and price increases, leading to a continuous rise in upstream companies' product prices, which led to a significant increase in the company's hardware procurement costs during the reporting period.